Supersizing small business: More firms can compete for set-asides

Oct. 22, 2012 - 06:23AM
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A federal rule change in March has opened the gates for more competition for small businesses seeking federal contracts. Under the first comprehensive revision of the definition of “small business” in 25 years, more midsize companies can now compete for small-business contracts. Here, architect Chris Robinson in June describes a steel wall that allows air flow for a facilities generator while protecting equipment at The Forrest County Community Shelter at the Forrest County Multi Purpose Center in Mississippi. (Ryan Moore / Hattiesburg American via Gannett)

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Nati Soto, owner of a Miami architecture firm that employs six people, said in her 18 years in business, she always faced strong competition going after federal contracts set aside for small businesses.

Most of her federal work has been as a subcontractor to larger firms required to set aside a certain amount of work for small businesses, she said.

For Soto, it means architecture companies that bring in up to seven times the revenue of her $1 million firm canqualify as small. Soto fears those bigger firms will be more attractive to large businesses and agencies that have small-business goals to meet and prefer to work with bigger companies.

“Some of us like to maintain a boutique firm and smaller staff,” she said. “But it’s becoming very difficult in federal business.”

Small companies in a number of industries can expect increased competition for federal work as the Small Business Administration rolls out new size standards that redefine “small.” But with more firms qualifying as small, agencies will be able to award more small-business contracts. Previously, larger companies were often awarded contracts because there weren’t the minimum two small firms with the necessary resources and capabilities to qualify for the business. And some firms caught in the middle — too big to qualify as small yet not big enough to compete for larger projects — found themselves squeezed out of business on both ends.

For example, federal transportation projects are increasingly being procured using a design-build method, which requires both architecture and engineering services, said Sanjay Naik, president of the Naik Consulting Group, an engineering firm.

When his company was small, it could not have competed for this work, Naik said. When the firm passed the $4.5 million mark, the previous revenue limit for engineering firms to be considered small, it was not prepared to compete against multimillion- and billion-dollar firms, either, he said. The expanded size standard now allows Naik Consulting to compete on larger contracts and subcontracts still outside the reach of very small, specialized firms, Naik said. when his company hits the $14 million mark, the new revenue limit for small engineering firms, it will be better prepared, with more experience with larger contracts and partnerships with bigger companies, Naik said.

The struggles of the midsize business are understandable, small-business advocates say, but SBA was created to help the smallest companies grow into midsize and large companies.

“If you talk to small businesses that are working on getting government contracts, it’s already extremely difficult,” said Brian Reeder, spokesman for the American Small Business League. “Now that they have to compete against these midsize companies — and in some industries, they shot the standard up so high, it’s really big companies — it’s virtually impossible to get contracts, especially a new small firm trying to get into the market.”

Even before the revisions, small businesses were hurting due to several factors. Federal budget cuts have caused agencies to spend less on contracts, so firms that cover a variety of professional services are grabbing up work that could have gone to small businesses like his, said Paul Roberts, owner of PR&P Architects in Vallejo, Calif.

Agencies prefer to work with larger firms because they perceive it to be less risky than a new firm with limited resources and experience, he said.

While federal work made up a small percent of Roberts’ business in the past — roughly 15 percent — now he is not pursuing contracts at all, largely because the increased competition makes it less likely he will win work and recoup the cost of bidding, he said.

“I don’t think anyone has this belief that a 20-person firm, which I think is a good-size firm, that they should be going after a $200 [million] to $300 million project,” he said. “The point is that you want a reasonable shot for the projects you can readily complete.”

But those opportunities have dwindled over the last five years, and so has his company — from a $3 million, 20-person firm to a one-person, $300,000 firm, he said.

SBA said the changes aim to reflect the current realities of industry — the last such revision started in the late 1970s and lasted through the early 1980s. The 2010 Small Business Jobs Act now requires the SBA to review at least half of the size standards every 18 months, with each standard getting a review at least every five years.

Small businesses have noted that the government stands to benefit from size standard increases because it will help agencies meet their legal requirement to award a combined 23 percent of federal contracting dollars to small businesses. The government has not met its goal since 2005, and legislators have proposed cutting agency budgets or barring senior executives from receiving annual bonuses if they miss their small-business contracting goals.

But if SBA’s intention was to help agencies with their small-business goals, it could have increased some standards, such as computer-related services, by much more, industry experts said. The majority of the size standards for IT professional services saw nominal increases from $25 million to $25.5 million, compared with some industries that saw their size standards double or triple.

“Despite their advocacy for small businesses, the parts of the organization that do the size standards are trying to be scientific, trying to reflect what the economic changes are, and I don’t think it’s unduly influenced by the importance of increasing socioeconomic awards,” said Ray Bjorklund, chief knowledge officer at Deltek market research firm.

“Did SBA get it perfectly right? No. It really is a hard thing to do because they have so many stakeholder interests they have to accommodate,” he said. “But it’s a little better, and each time they do it, hopefully, it will make it better.”